Frequently occurring regulatory findings

Actuarial Reports

Actuarial reports submitted to OSFI are generally reviewed by the plan’s Relationship Manager in the Private Pension Plans Division and may be referred to its actuarial team for a more detailed review.

The Instruction Guide for the Preparation of Actuarial Reports for Defined Benefit Pension Plans sets out the reporting requirements for actuarial reports filed with OSFI. Based on the Canadian Institute of Actuaries (CIA) Standards of Practice, we expect plan actuaries to provide sufficient details in their actuarial report to enable another actuary to assess the reasonableness of the data, assumptions, and methods used.

We remind plan actuaries of OSFI’s expectations relating to the following items that often cause concern in the actuarial reports that we review in more detail:

1. Going concern valuation – Disclosure of sources of experience gains and losses

   OSFI considers the reconciliation of the going concern valuation results a useful disclosure in an actuarial report because it includes the sources of experience gains and losses.

   Experience gains and losses should be shown separately for each assumption made in the actuarial report (e.g. investment return and expenses), unless the gain or loss related to the assumption is considered not material. Where gains and losses with respect to two or more assumptions are combined, the report should state that gains or losses for assumptions not shown separately are not considered material.

   The actuary should explain any significant or unusual gains or losses in the actuarial report.

2. Solvency valuation – Mortality assumption for benefits expected to be settled by the purchase of annuities

   The mortality basis for benefits expected to be settled by the purchase of annuities should be the CPM2014 mortality table (and CPM-B projection scale), unless the actuary justifies and explains in the actuarial report why the use of this table would not be appropriate. Where adjustments are made in accordance with the CIA mortality study (e.g. for pension size or industry) and/or where another base mortality table (e.g. CPM2014Priv) is chosen, a detailed justification should be included in the actuarial report.

   Only very large plans (e.g. 10,000+ retirees) are expected to have sufficient actual credible experience to customize published mortality tables such as the CPM2014 or use plan-specific mortality tables. Other plans may only have partially credible or insufficient experience to develop broad adjustments to the CPM2014.

   While the CIA Final Report on Canadian Pensioners’ Mortality includes actual to expected (A/E) ratios for industries, it also warns that industry analysis has not proven to be conclusive, and that the A/E ratios used to adjust mortality should be used with caution. Mortality experience for larger and more homogenous groups is expected to exhibit more credible results than for smaller, diverse industries.

   Unless an annuity quote is provided by a life insurance company, the extent to which a group’s substandard mortality would be reflected in the pricing of annuities is unclear. As such, it generally cannot be concluded that a life insurance company would use the same basis for the purchase of annuities as is used for the going concern valuation.

   Therefore, in the context of benefits expected to be settled by the purchase of annuities, OSFI expects that the mortality adjustments included in the actuarial report would reflect only the characteristics of the plan that are significantly different from the underlying data of the CPM2014 mortality table.

3. Going concern and solvency valuation – Disclosure of assumption for consent benefits

   Some plans offer benefits that are subject to administrator or employer consent, such as unreduced early retirement benefits. In these cases, OSFI expects the actuary to make a reasonable assumption of the number of members that will be granted consent and clearly disclose this assumption in the actuarial report. Unless plan experience justifies otherwise, it would generally not be acceptable to assume that no members will be granted consent for the purpose of the going concern valuation.

   OSFI allows the exclusion from solvency liabilities of benefits genuinely subject to consent of the plan administrator. If the plan includes such benefits, the actuarial report should specify whether consent to these benefits is assumed to be granted for solvency valuation purposes. When making this assumption the actuary should consider how the benefits are administered in practice, and obtain confirmation from the plan administrator of the treatment of consent benefits in the event of a plan termination.

Examinations

As communicated in InfoPensions 18, OSFI conducts examinations of a select number of pension plans each year. Desk reviews and on-site examinations performed in 2017 revealed some recurring areas of concern that resulted in similar recommendations for the plans examined. These included the following:

1. Governance documents are not sufficiently detailed and governance self-assessments are not completed

   Some plans do not have comprehensive written documentation regarding the roles, responsibilities and accountabilities of those involved in the administration of the plan. In addition, not all plan administrators are performing periodic self-assessments to determine the effectiveness of the administration of their plans. We understand that, depending on the size of the plan, governance documents and self-assessments may vary.

   Although OSFI does not require plan administrators to use a specific type of governance model or self-assessment technique, the Canadian Association of Pension Supervisory Authorities’ Guideline No. 4 – Pension Plan Governance and the Self-Assessment Questionnaire are recommended resources to help plan administrators meet their governance responsibilities.

2. The Statement of Investment Policies and Procedures (SIP&P) is not reviewed annually

   Some plan administrators have not been reviewing their SIP&P annually as required by section 7.1 of the Pension Benefits Standards Regulations, 1985. The results of this annual review should be documented.

3. There is no formal process to report to the board of directors/trustees and meeting minutes documenting the reporting are not sufficiently detailed

   Some plans do not have a formal process in place to regularly report to the board of directors/trustees (board) on matters pertaining to the operation of the plan. The level of reporting should be sufficient to allow the board to determine that it is fulfilling its fiduciary obligations, as plan administrator, to members and other plan beneficiaries.

   In addition, OSFI has found that the minutes of meetings/discussions held by the board or pension committee(s) relating to the plan are not comprehensive. Minutes of meetings are an important historical record of the decisions taken and should include the rationale and factors that were considered. Plan administrators should maintain appropriate records of key meetings and decisions affecting the plan, and confirm follow-up action.

Plan administrators are encouraged to review these recommendations in the context of their pension plans to address and prevent similar concerns.